Publication of 2013 Annual Report

RNS Number : 4470E

Evraz Plc

09 April 2014

 



2013 Annual Report of EVRAZ plc ("EVRAZ")

EVRAZ has today:

•    posted its Annual Report for the year ended 31 December 2013 ("2013 Annual Report") on its website: http://www.evraz.com/investors/annual_reports/ as required by DTR 6.3.5 R (3); and

•    submitted to the UK National Storage Mechanism a copy of its 2013 Annual Report in accordance with LR 9.6.1 R.

The 2013 Annual Report will shortly be available for inspection on the National Storage Mechanism http://www.morningstar.co.uk/uk/NSM

The 2013 Annual Report and the Notice of the Company's Annual General Meeting, which will be held on 12 June 2014 in London, will be posted to shareholders on or around the end of April 2013.

The Appendix to this announcement contains additional information which has been extracted from the 2013 Annual Report for the purposes of compliance with DTR 6.3.5 only. It should be read in conjunction with EVRAZ's Preliminary Results Announcement issued on 9 April 2014. Together these constitute the material required by DTR 6.3.5 and DTR 4.2.3 to be communicated to the media in unedited full text through a Regulatory Information Service. This announcement should be read in conjunction with and is not a substitute for reading the full 2013 Annual Report. Page and note references in the text below refer to page numbers and notes in the 2013 Annual Report and terms defined in that document have the same meanings in these extracts:

•    a description of principal risks and uncertainties;

•    a note on related party transactions; and

•    the Directors' Responsibilities Statement.

For further information:

Media Relations:

Vsevolod Sementsov

VP, Corporate Communications

London: [phone]         Moscow: [phone]

[e-mail]

Investor Relations:

Sergey Belyakov

Director, Investor Relations

London: [phone]         Moscow: [phone]

[e-mail]

Regulatory enquiries:

For information about proxy voting, dividends and to report changes in personal details, shareholders should contact the Company's registrar:

Computershare Investor Services PLC

The Pavilions

Bridgwater Road

Bristol BS13 8AE

United Kingdom

Tel: [phone]

Fax [phone]

Email: [e-mail]

APPENDIX

PRINCIPAL RISKS AND UNCERTAINTIES

Like all businesses, EVRAZ is affected by, and must manage, risks and uncertainties that can impact its ability to deliver its strategy. While the risks can be numerous, the principal risks faced by the Group as identified by the Board are described below along with the corresponding mitigating actions and changes in the risk level during the year.

To date the Group has not been significantly impacted by recent geopolitical developments relating to Ukraine. There is a risk, however, that, if these events were to escalate, there could be an impact on EVRAZ's operations in the country (EVRAZ generated 7% of consolidated revenue from its Ukrainian business). In addition, EVRAZ may be affected by government sanctions if they are broadened from the current level.

Global economic factors, industry conditions and cost effectiveness 

Risk description

EVRAZ Steel, Mining and Vanadium operations are highly dependent and sensitive to the global macroeconomic environment, economic and industry conditions, eg global supply/demand balance for steel and particularly for iron ore and coking coal which has the potential to significantly affect both product prices and volumes across domestic and export markets.  As EVRAZ's operations have a high level of fixed costs, global economic and industry conditions can impact the Company's operational performance and liquidity.

Mitigating actions

EVRAZ has a focused investment policy aimed at reducing and managing the cost base with the objective of being among the sector's lowest cost producers.

Health, safety and environmental (HSE) issues

Risk description

Safety and environmental risks are inherent to the Company's principal business activities of steelmaking and mining. Furthermore, EVRAZ operations are subject to a wide range of HSE laws, regulations and standards, the breach of any of which may result in fines, penalties or other sanctions. Such actions could have a material adverse effect on the Company's business, financial condition and business prospects.

Mitigating actions

HSE issues have direct oversight at Board level and HSE procedures and material issues are given top priority at all internal management level meetings. Management KPIs include a material factor for safety performance. EVRAZ has instigated a programme to improve the management of safety risks across all business units with the objective of embedding a new safety, harm-free culture at all management and operational levels. Safety training has been reviewed and strengthened and an operational safety assessment is undertaken for all new projects.

Dependency on certain key markets

Risk description

The Company's profitability is highly dependent on limited geographical markets, i.e. 43% of EVRAZ revenues are derived from Russia, and 22% from North America; and also dependent on the mix between semi-finished and finished steel products.

Mitigating actions

The strategic risks and opportunities within these regions are regularly reviewed, including consideration of the quality and nature of the Company's product portfolio, relative cost effectiveness and the sustainability of industry sector market positioning together with effective in-house (EVRAZ Metall Inprom) and external distribution networks.

Capital projects and expenditure

Risk description

EVRAZ's maintenance and development capital expenditure, in addition to capital expenditure focused on improving the Company's cost effectiveness, is aligned to the Company's and external market expectations for each particular project and to maximise levels of investment returns.

Economic issues outside those factored into the Company's business plans including regulatory approvals, may negatively impact the Company's anticipated free cash flow and cause certain elements of the planned capital expenditure to be re-phased, deferred or abandoned with consequential impact on the Company's planned future performance.

Mitigating actions

Project delivery is closely monitored against project plans resulting in high level action to manage project investment both for timely delivery and for planned project expenditure.

In the course of 2013 the Company revisited key assumptions of the main investment projects and performed scenario analysis, which resulted in the suspension and/or postponement of certain projects.

Human Resources

Risk description

The principal HR risk is the quality and availability of critical operational and business skills of EVRAZ management and employees, particularly in certain regions and for particular business units, eg mining professionals including engineers, mining experts and project managers. Associated risks involve selection, recruitment, training and retention of employees and qualified executives.

There is also a risk of employee union action. Union relations are largely stable, although the Company had a short-lived labour action at its vanadium operations in South Africa in 2013, and an extended period of negotiations with certain labour unions in Russia.

As a result of HR risks, the Company's growth plans might be jeopardised.

Mitigating actions

Succession planning is a key feature of EVRAZ's human resources management. EVRAZ seeks to meet its leadership and skill needs through retention of its employees, internal promotion, structured professional internal mentoring and external development programmes.

Potential Actions by Governments

Risk description

EVRAZ operates in a number of countries and there is a risk that governments or government agencies could adopt new laws and regulations, or otherwise impact the Company's operations.

New laws, regulations or other requirements could have the effect of limiting the Company's ability to obtain financing in international markets, or selling its products.

Mitigating actions

Although these risks are mostly not within the Company's control, EVRAZ and its executive teams are members of various national industry bodies and, as a result, contribute to the thinking of such bodies and, when appropriate, participate in relevant discussions with political and regulatory authorities.

Business Interruption

Risk description

Prolonged outages or production delays, especially in coal mining, could have a material adverse effect on the Company's operating performance, production, financial condition and future prospects. In addition, long term business interruption may result in loss of customers, competitive advantage being compromised and damage to the Company's reputation.

Mitigating actions

The Company has defined and established business continuity plans, procedures and protocols which are subject to regular review and audit of their appropriateness and effectiveness. The Company carries certain business interruption insurance, except for particular mining events.

Business interruptions in mining mainly relate to production safety. Measures to mitigate these risks include methane monitoring and degasing systems, timely mining equipment maintenance, employee safety training.

In 2013 EVRAZ had to suspend mining works at the Raspadskaya underground mine in May-July due to increased levels of carbon monoxide. A set of safety measures was undertaken in order to alleviate the causes of hazards.

Treasury

Risk description

EVRAZ, as with many other large and multi-national corporates, faces various treasury risks including liquidity, credit access, currency fluctuations, and interest rate and tax compliance risks.

Mitigating actions

EVRAZ employs skilled specialists to manage and mitigate such risks and the management of such risks is embedded in internal controls. Oversight of the key risks is reported within the monthly Board reports and by the review of compliance of such internal controls by a management independent internal audit function, which reports to the Audit Committee on a monthly basis.

In 2013 EVRAZ undertook certain actions in order to extend the debt maturity profile and lower short term external funding needs, i.e. through issuing US$1,000 million Eurobonds due in 2020, as well as. proactively managing the remaining portion of debt subject to maintenance covenants. The EVRAZ Treasury management team and the directors regularly and pro-actively review all funding requirements and exposures.

Taxation

Risk description

EVRAZ operates in various jurisdictions, and changes to national tax laws, including those which could be adopted based on recommendations by international organisations (eg OECD's BEPS project etc) are not within management's control. 

Russian tax legislation is developing and undergoes frequent changes; tax law enforcement is subject to varying interpretations. Management's interpretation of such legislation may be challenged by the relevant regional and federal authorities, which could adversely affect the financial position of EVRAZ's Russian subsidiaries, despite any planning efforts.

Mitigating actions

EVRAZ has a taxation control function which monitors planned changes to tax laws, analyses their impact on EVRAZ's operations and reports them to the Company's management on a quarterly basis. Management's possible actions to address tax challenges include making provisions (if applicable) in the financial statements; implementing if necessary, changes to the Company's organisational structure and adjustments to cash flow structure.

Note 16

Related Party Disclosures

Related parties of the Group include associates and joint venture partners, key management personnel and other entities that are under the control or significant influence of the key management personnel, the Group's ultimate parent or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.

Amounts owed by/to related parties at 31 December were as follows:

	Amounts due from related parties			Amounts due to related parties
US$ million	2013	2012	2011	2013	2012	2011
Kazankovskaya	$                -	$            23	$            21	$              -	$              -	$              -
Raspadsky Ugol	-	2	2	-	42	39
Vtorresource-Pererabotka	4	3	-	13	45	-
Yuzhny GOK	5	4	5	336	163	46
Liability to management of Raspadskaya for the acquisition of Corber (Note 4)	-	-	-	102	-	-
Other entities	7	14	9	7	7	13
	16	46	37	458	257	98
Less: allowance for doubtful accounts	(3)	(34)	(29)	-	-	-
	$            13	$            12	$              8	$         458	$         257	$            98

In 2013, 2012 and 2011, the Group recognised an expense for bad and doubtful debts of related parties in the amount of $Nil, $4 million and $7 million, respectively.

Transactions with related parties were as follows for the years ended 31 December:

	Sales to related parties			Purchases from related parties
US$ million	2013	2012	2011	2013	2012	2011
Genalta Recycling Inc.	$              -	$              -	$              -	$            22	$            14	$            10
Interlock Security Services	1	1	1	51	48	43
Kazankovskaya	-	1	1	-	1	5
Raspadsky Ugol	-	8	8	5	127	207
Vtorresource-Pererabotka	16	14	-	462	485	-
Yuzhny GOK	62	66	42	150	124	165
Other entities	7	9	8	38	31	27
	$            86	$            99	$            60	$          728	$          830	$          457

In addition to the disclosures presented in this note, some of the balances and transactions with related parties are disclosed in Notes 4, 11, 13 and 25.

Genalta Recycling Inc. is a joint venture of a Canadian subsidiary of the Group. It sells scrap metal to the Group.

Interlock Security Services is a group of entities controlled by a member of the key management personnel, which provide security services to the Russian subsidiaries of the Group.

Kazankovskaya was an associate of the Group (Note 11). The Group purchased coal from the entity and sold mining equipment and inventory to Kazankovskaya. In 2012 and 2011, the Group issued short-term loans to Kazankovskaya bearing an interest rate ranging from 8.1% to 8.5% per annum. At the reporting dates, the Group assessed the recoverability of these loans and recognised a loss, which was included in the other non-operating expenses caption of the consolidated statement of operations (2012: $5 million, 2011: $3 million). In 2013, the Group acquired a controlling interest in Kazankovskaya (Note 11) and subsequently sold the subsidiary to a third party (Note 12), consequently, this entity ceased to be a related party to the Group.

Lanebrook Limited is a controlling shareholder of the Company. In 2008, the Group acquired from Lanebrook a 1% ownership interest in Yuzhny GOK for a cash consideration of $38 million (Note 18). As part of the transaction, the Group signed a put option agreement that gives the Group the right to sell these shares back to Lanebrook Limited for the same amount. In January 2014, the Group sold 0.14% of the shares to Lanebrook Limited for $5 million. The put option for the remaining shares expires on 31 December 2014.

In addition, in 2012 the Group sold one of its subsidiaries to Lanebrook (Note 12).

OOO Raspadsky Ugol ("Raspadsky Ugol"), a subsidiary of Raspadskaya (Note 11), sold coal to the Group and the Group sold steel products and rendered services to Raspadsky Ugol. In 2013, Raspadsky Ugol ceased to be a related party as the Group obtained control over the entity (Note 4).

Vtorresource-Pererabotka is a subsidiary of Streamcore, the Group's joint venture, acquired in 2012. It sells scrap metal to the Group and provides scrap processing and other services. In 2013 and 2012, the purchases of scrap metal from Vtorresource-Pererabotka amounted to $370 million (1,420,990 tonnes) and $399 million (1,366,423 tonnes), respectively.

Yuzhny GOK, an ore mining and processing plant, is an associate of Lanebrook Limited. The Group sold steel products to Yuzhny GOK and purchased sinter from the entity. In 2013, the volume of purchases achieved 1,549,958 tonnes.

In addition to the purchase transactions disclosed above, in July 2011 the Group acquired an office building for its administrative staff in Moscow from OOO Zapadnye Vorota, an entity under the control of the ultimate principal shareholders of the Group. The cash consideration (including VAT) amounted to $102 million.

The transactions with related parties were based on market terms.

Compensation to Key Management Personnel

Key management personnel include the following positions within the Group:

§ directors of the Company,

§ vice presidents,

§ top managers of major subsidiaries. 

In 2013, 2012 and 2011, key management personnel totalled 57, 55 and 55 people, respectively. Total compensation to key management personnel were included in general and administrative expenses in the consolidated statement of operations and consisted of the following:

US$ million	2013	2012	2011
Salary	$              24	$              21	$              20
Performance bonuses	13	14	12
Social security taxes	3	3	1
Share-based payments (Note 21)	11	10	13
Termination benefits	-	-	3
Other benefits	1	1	1
	$              52	$              49	$              50

Other disclosures on directors' remuneration required by the Companies Act 2006 and those specified for audit by the Directors' Remuneration Report Regulations 2002 are included in the Directors' Remuneration Report.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Each of the directors listed in the Governance section of the Annual report confirm that to the best of their knowledge:

·    the consolidated financial statements of EVRAZ plc, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole (the 'Group');

·    the Annual Report and Accounts taken as a whole, which incorporates the Strategic Report and the Directors Report, is fair, balanced and understandable, and that it provides the information necessary for shareholders to assess the Company's performance, business model and strategy and that it includes a fair review of the development and performance of the business and the position of the Company and the Group, together with a description of the principal risks and uncertainties that they face.

By order of the Board

Alexander Frolov

Chief Executive Officer

EVRAZ plc

 

END

 

 

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